Law Society v Sephton, House of Lords, 10 May 2006
Subject: Limitation of Actions
Issue
When does a claimant’s cause of action accrue so as to start time running for the purpose of the Limitation Act 1980.
Summary
A cause of action accrues only when the interest of the claimant suffers damage that is quantifiable in money terms. Where the negligence of the defendant creates only contingent damage, that is damage that may or may not materialise depending on subsequent events, the cause of action only accrues when the damage does materialise and time for limitation purposes does not begin to run until that later date.
Significance
The decision clarifies the law on limitation by making it clear that where the defendant’s negligence causes contingent damage to the claimant, time for limitation purposes does not begin to run at the earlier date when the claimant is first exposed to potential liability, but at the later date when the contingent damage materialises in a form quantifiable in money terms.
Background
According to the Limitation Act 1980 S 2, an action in tort “shall not be brought after the expiration of 6 years from the date on which the cause of action accrued”.
The Decision
During the 6 year period ending in March 1996 a solicitor misappropriated £750,000 from his client funds. The defendant auditors had during that period annually issued certificates to confirm that the client accounts were in order.
In April 1996 one of the solicitor’s clients complained to the Law Society , who investigated and took control of the solicitor’s affairs in May 1996.
In July 1996 the Law Society received a claim on the Solicitors’ Compensation Fund from one of the aggrieved clients.
The Society settled claims from clients who had lost money and commenced a recovery action in negligence against the accountants in May 2002. Given the 6 year limitation period, then all causes of action accruing before May 1996 were time-barred.
It was argued for the defendant accountants that each time they negligently issued a certificate approving the solicitor’s accounts they caused damage to the Society by exposing them to the liability of compensating clients whose funds were subsequently embezzled. A cause of action in respect of such potential damage accrued to the Society when each certificate was negligently issued. The last certificate was issued in 1995. As the Society’s action was commenced in May 2002 all causes of action accruing to them before May 1996 were time-barred.
The Court rejected these arguments and held that the Society’s claim was not time barred for the following reasons.
The Court held that a cause of action accrued when the interest of the claimant was adversely affected in a way that was quantifiable in money terms. An example was Forster v Outred (1982) where the claimant had mortgaged her property on the negligent advice of the defendant. The cause of action accrued on the completion of the mortgage because the claimant’s interest in the property was worth less with the mortgage attached to it. The claimant had therefore suffered damage that was quantifiable in money terms.
This also applies where as a result of the defendant’s negligence the claimant receives something of less value than should have been the case. For example in Knapp v Ecclesiastical Insurance (1997) where the claimant received a voidable insurance policy as a result of negligence on the part of his broker. Again the cause of action accrued when the policy was issued because the claimant received a tainted policy instead of an entirely valid one. While the damage here does not translate directly into money terms it would be possible for a court to attach a value to the damage if that were required.
In the present case the negligent issue of the certificates did not immediately cause the Society damage that was quantifiable in money terms. The negligent acts gave rise to a purely contingent liability on the Society in the sense that the potential liability might or might not materialise depending on subsequent events. The solicitors might have made good the deficiency or no claim might have been made against the fund. It followed that when each negligent certificate was issued it did not cause to the Society any damage that was quantifiable in money terms at that time. In the absence of such damage no cause of action accrued to the Society and time did not begin to run.
When a claim was made on the fund the Society did suffer damage that was quantifiable in money terms and time did not begin to run before that date.
As the first claim was made in July 1996 the action that was commenced in May 2002 was within 6 years of the cause of action accruing to the Society and so was not time-barred.
Brendan O'Keeffe
Claims Counsel, Swiss Re UK
